Debt-fuelled growth can have unintended consequences if the business environment does not pan out as expected. An estimated $5.3 billion worth of foreign currency convertible bonds (FCCBs) are expected to mature next year. According to IIFL, the bonds are estimated to have a redemption value of $7.2 billion.

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Prasad Koparkar, Head-Industry & Customised Research at CRISIL Research says “The risk in terms of conversion not happening is very high." A study by CRISIL Research in May this year found that close to two-thirds of the FCCBs maturing by March 2013 are unlikely to get converted into equity shares due to the huge gap between market and conversion rates.

Companies will have the option to either redeem FCCBs or reset their conversion price downwards. Resetting the conversion price to lower levels could significantly dilute the promoter holding.

Overall, companies with sound finances could raise money at competitive rates. But they cannot avoid the pain of high refinancing costs. Ashutosh Datar and Ravi Saraogi of IIFL said in a note “With stock prices depressed, a large majority of the issues would need to be redeemed, and refinanced by domestic ‘expensive’ debt in most cases, creating refinancing risk as well as impacting profitability."

Reliance Communications, Tata Steel, Tata Motors, Jaiprakash Associates, JSW Steel, GTL Infrastructure and Suzlon Energy are some of the notable companies whose FCCBs will mature in 2012. While the gap between the conversion rate and market price is the lowest for Tata Motors it is very large for Reliance Communications, according to IIFL.